Goldman Sees April Rate Cut as South Korean Bonds Extend Gains

  • `Never sell a Korean treasury bond,' ING's Tim Condon says
  • Won heads for best month in seven years as dollar retreats

South Korean government bonds extended gains as Goldman Sachs Group Inc said changes in the central bank’s monetary policy board will likely spur further easing.

The three-year notes are set to advance for a fourth month, the longest rally since 2014, and the won climbed to the highest since November as global funds poured $4.8 billion into local assets. Four new members named Monday by the Bank of Korea will constitute a majority on its board, and may be open to adding stimulus by lowering interest rates or through targeted asset purchases, Goldman Sachs economists Goohoon Kwon and Irene Choi wrote in a report.

“All four new members have reportedly held views that structural reforms are key for sustained growth given global trade stagnation and rising competition from China and Japan," Kwon and Choi wrote. They expect the BOK to cut in April, after holding its benchmark at a record low 1.5 percent for nine months.

The three-year yield fell one basis point on Wednesday and in March to 1.45 percent in Seoul, Korea Exchange prices show. That’s lowest since Feb. 17 and is down 21 basis points this year. Ten-year government bonds advanced for a second day, with the yield declining three basis points to 1.78 percent.

Growth Outlook

Growth in Asia’s fourth-largest economy will likely be lower than the central bank’s initial 2016 forecast of 3 percent, although recent data show confidence is edging up and exports are not as weak, BOK Governor Lee Ju Yeol said in a press briefing Wednesday.

“Never sell a Korean treasury bond," Tim Condon, head of Asia research in Singapore at ING Groep NV, said in a note. The “risk-on" environment has boosted the won, and ING will probably raise its year-end forecast from 1,250 per dollar currently, he wrote.

The won was headed for its best month since April 2009 on speculation investors will keep buying riskier assets after Federal Reserve Chair Janet Yellen reaffirmed a gradual approach to raising U.S. interest rates. The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major global peers, fell 0.8 percent on Tuesday.

The won rose 1.1 percent to 1,151.09 a dollar, the strongest level since Nov. 27, according to data compiled by Bloomberg. Its 7.4 percent gain this month marks Asia’s best performance. China, South Korea’s biggest overseas market, fixed the yuan reference rate higher against the dollar by the most in eight days.

“The near-term focus is on U.S. dollar weakness," said Eddie Cheung, a Hong Kong-based currency strategist at Standard Chartered Plc. “More flows are back into emerging markets, and that’s benefited the won."

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